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Beginning in the 1990s, there was a substantial increase in the number of short-term acute care hospitals that primarily treat patients with specific medical conditions or who need surgical procedures. Advocates of such hospitals, commonly referred to as specialty hospitals, contend that their focused missions and dedicated resources can both improve quality and reduce health care costs. Critics contend that specialty hospitals siphon off the most profitable procedures and patient cases, typically without providing emergency care or other vital community services, and thus erode the financial health of neighboring general hospitals. Critics also contend that the ability of physicians to invest in a specialty hospital and then refer patients to that hospital creates financial incentives that may inappropriately affect physicians' clinical and referral behavior. In 2003, we issued two reports on the growth, characteristics, and performance of specialty hospitals. More than two-thirds of the 100 specialty hospitals we identified as being in existence in June 2003 had opened their doors since the beginning of 1990. The specialty hospitals in existence in fiscal year 2000, the most recent year for which we then had data, accounted for about 1 percent of Medicare spending for inpatient services. We also identified an additional 26 specialty hospitals under development in 10 states. Approximately 70 percent of the existing specialty hospitals were owned, in part or in whole, by physicians. Subsequent to our reports, Congress, through the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), established a moratorium which, in effect, temporarily halted further development of physician-owned specialty hospitals that focus on cardiac, orthopedic, or surgical procedures and mandated additional studies of specialty hospital issues. Specialty hospitals in operation as of November 18, 2003, are grandfathered under the moratorium and are allowed to expand within limits. Specialty hospitals not opened as of that date may apply to the Centers for Medicare & Medicaid Services (CMS) and request a determination of their development status. Hospitals not open as of November 18, 2003, but sufficiently advanced in their development may be grandfathered. The MMA moratorium expires June 8, 2005. To help Congress consider the likely consequences of the moratorium's expiration, Congress asked us to provide updated information on the potential growth in the number of physician-owned specialty hospitals. This report responds to that request by presenting information that addresses the following questions: (1) How many applications for grandfather determinations has CMS received from specialty hospitals under development, what types of specialty hospitals applied, where were these hospitals located, and how many of the applications have been approved? (2) What information exists to indicate the likely number, location, and type of specialty hospitals not exempt from the moratorium that may be developed following its expiration?

As of April 29, 2005, CMS had received 40 applications from specialty hospitals under development seeking determinations that they were grandfathered under MMA's moratorium. CMS received 38 applications for new specialty hospitals and 2 applications for specialty hospital expansions. Slightly more than half (22) of the 40 applications were from surgical hospitals, while the rest were from cardiac hospitals (9), orthopedic hospitals (5), or hospitals that did not indicate their specialty (4). Three-fourths of the applications came from hospitals in four states: Texas (19), Louisiana (6), California (3), and Oklahoma (3). Of the 40 applications it received, CMS issued 12 favorable opinions (approvals) and 2 unfavorable opinions (denials). One of the 40 applications had been withdrawn. Comprehensive information about specialty hospitals that may be developed when the moratorium expires is both difficult to acquire and verify, although what does exist indicates continued growth in the number of specialty hospitals--in California, South Carolina, and Texas. Of the 52 facilities tentatively identified by AHA, FAH, and others as specialty hospitals under development, and that did not apply for a determination on whether they were subject to the moratorium, we were able to obtain information corroborating that 6 of the facilities will be physician-owned specialty hospitals. One of the 6 new facilities is planned as a cardiac hospital; the remaining 5 new facilities are slated to be surgical hospitals. Four of the 52 facilities had already opened as physician-owned specialty hospitals, while 4 others were no longer under development. We were unable to obtain sufficient information to determine the status and characteristics of 17 facilities. Finally, the available information for the remaining 21 of the 52 facilities indicated that they would not be physician-owned specialty hospitals. In short, the group of 52 facilities could include anywhere from 6 to 23 specialty hospitals under development. Additional facilities, especially those in the early planning stages, could also be under development as specialty hospitals. Representatives of community hospitals are concerned that the number of specialty hospitals could grow rapidly following the moratorium's expiration. In contrast, most representatives of specialty hospitals said that continued uncertainty over future federal actions and other factors would cause any such growth to be both moderate and gradual. Upon reviewing a draft of our report, CMS acknowledged the usefulness of our report and provided context for the scope of the specialty hospital issue.